Investment

Premium Bonds explained for potential investors

Throughout the pandemic, many Brits have saved more than ever before. According to the Financial Times, UK household savings have increased by almost 2% over the last quarter. A whopping 20 million Brits have committed to saving more of their income as the pandemic wages on.

Premium bonds are the UK’s most popular savings product. Research conducted by financial services company, ETX Capital, found that this type of bond is the most searched for online, with 368,000 monthly searches. The figures for premium bonds are miles ahead the next most-searched savings strategy, with Lifetime Isa looked up online 74,000 times a month.

What are premium bonds?

Premium bonds are a savings account and investment product issued by National Savings & Investment (NS&I). Owners of these premium bonds can put money into their account – with the freedom to take it out again whenever they want. Interest is paid, decided by a monthly prize draw. Investors can win between £25 and £1 million tax-free.

Bonds are for sale for £1 and each has an equal chance of winning, meaning the more you own, the greater your chances. Winners are generated by the NS&I’s Ernie, an audited random number generator.

How do I buy premium bonds?

The easiest way to buy bonds is directly from the NS&I website. The minimum purchase for one-off investments and monthly standing orders is £25. The maximum amount an investor can hold is £50,000.

Individuals must be over 16 to buy premium bonds outright. For those under the legal age, the bonds may be held by the child’s parent or guardian. Anyone can buy premium bonds for an under-16 and nominate the carer to hold them.

Bonds must be held for a full month before they’re eligible to win. If you’re moving money over from other savings into premium bonds, it’s best to do so in the last week of the month. That way, investors minimise the time the money is not earning interest and not in a prize draw.

Winning bonds are eligible to be cashed in and reinvested. This means that is you win on a bond one month, it can be re-entered into the next month’s prize draw. Bonds continue to be eligible until you exchange them for cash, which you can do so at any time. It can take up to eight working days for a full return on your cash.

Premium bonds can’t be passed on if you die, but their worth can be, although they aren’t inheritance tax-free.

How often is the prize draw?

Premium bond winning numbers are drawn on the first working day of each month. This means usually, prizes are drawn on the first, but sometimes are pushed to the second or even third day of a month. It all depends on when the weekend falls that year. Thanks to the bank holiday, in January 2022, the prize draw is as late as the fourth of the month.

There is, however, one exception to the prize draws. If you’re lucky enough to win one of the two £1 million monthly prizes, you should expect a visit from someone at NS&I the day before the first working day in the month. Make sure you keep your contact and address details up to date on the NS&I website!

If your contact details have been out of date for some time, it’s worth also checking if you have any unclaimed prizes in your name – there are currently around £69 million in unclaimed bond prizes.. Fingers crossed!

What are the chances of winning?

Although over 21 million people in the UK are saving more than £107 billion in premium bonds, the million-dollar question focuses on an investor’s chances of winning.

The closest thing premium bonds have to an interest rate is the annual prize rate, which currently stands at 1%. The interest rate lays out the average payout, but in reality this is a vague guideline which described the mean average. By this calculation, for every £100 paid into bonds, on average £1 a year is paid out in winnings. This, however, is impossible, as the smallest prize is £25.

In fact, Martin Lewis of Money Saving Expert’s Premium Bond Probability Calculator has shown that if 30 people each had £100 invested, for one to win a prize, the remaining 29 would have to win nothing.

In fact, with £21,500 invested for a year, calculations reveal that the median average winnings are £200, with a less than 1% prize rate.

According to the NS&I website, the chance of winning a prize draw is 1 in 34,500. In fact, your chance of winning the lottery per ticket on the National Lottery is one in 45 million a week, which is far more likely than the one in over 53 billion chance of becoming a millionaire through one single premium bond in a month. But of course, the more bonds owned, the greater the chance of a win. Remember, too, that bonds are entered into the draw every month instead of as a one-off.

Who is best suited to premium bonds?

The lottery-like nature of the premium bond prize draw means those with luck on their side may fare well from a punt. Ultimately, mindset matters here: investors must remember that the charm and focus of premium bonds is for the fun of it, rather than the focus on returns.

Premium bonds are better suited to those willing to invest more than £5,000 into the strategy, as the more invested, the more the odds tip in your favour.

The nature of premium bonds means individuals can quickly access their money and reclaim the cash. This makes them well suited to those who are saving for the long term but might want quick access every now and then.

In the past, one of the perks of premium bonds was their tax-free nature. Nowadays, however, 95% of people have tax-free savings interest. If you’re one of the ones who earns more interest than your personal savings allowance, having a decent amount in bonds might be a good idea.

Related reading:

Premium bond changes set to take effect in 2019

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